NATURAL GAS SERVICES GROUP, INC. The discussion and analysis of our financial condition and results of operations are based on, and should be read in conjunction with, our condensed consolidated financial statements and the related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC . This report and our Annual Report on Form 10-K contain certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, and information pertaining to us, our industry and the oil and natural gas industry that is based on the beliefs of our management, as well as assumptions made by and information currently available to our management. All statements, other than statements of historical facts contained in this report as well as our Annual Report on Form 10-K, including statements regarding our future financial position, growth strategy, budgets, projected costs, plans and objectives of management for future operations, are forward-looking statements. We use the words "may," "will," "expect," "anticipate," "estimate," "believe," "continue," "intend," "plan," "budget" and other similar words to identify forward-looking statements. You should read statements that contain these words carefully and should not place undue reliance on these statements because they discuss future expectations, contain projections of results of operations or of our financial condition and/or state other "forward-looking" information. We do not undertake any obligation to update or revise publicly any forward-looking statements. Although we believe our expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations or assumptions will prove to have been correct. Please read Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as it contains important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements.
Overview
We fabricate, manufacture, rent, and sell natural gas compressors and related equipment. Our primary focus is on the rental of natural gas compressors. Our rental contracts typically provide for initial terms of six to 24 months, with our larger horsepower units having contract terms of up to 60 months. After the initial term of our rental contracts, many of our customers have continued to rent our compressors on a month-to-month basis. Rental amounts are billed monthly in advance and include maintenance of our rented compressors. As ofMarch 31, 2022 , we had 1,276 natural gas compressors totaling 306,834 horsepower rented to 79 customers compared to 1,265 natural gas compressors totaling 287,914 horsepower rented to 80 customers atMarch 31, 2021 . We also fabricate natural gas compressors for sale to our customers, designing compressors to meet unique specifications dictated by well pressures, production characteristics, and particular applications for which compression is sought. Fabrication of compressors involves our purchase of engines, compressors, coolers, and other components, and our assembling of these components on skids for delivery to customer locations. The major components of our compressor packages are acquired through periodic purchase orders placed with third-party suppliers on an "as needed" basis, which presently require lead times between three to six months with delivery dates scheduled to coincide with our estimated production schedules. Although we do not have formal continuing supply contracts with any major supplier, we believe we have adequate alternative sources available. Recent inflationary pressures have created price increases in both major and minor components for our compressors as well as longer than normal lead times for such components. To date, we have been able to increase our rental rates and sales prices proportionally; however, if cost increases continue and we are no longer able to increase our rental rates and sales prices such an event could have a material adverse effect on the results of our operations and financial condition. We also manufacture a proprietary line of compressor frames, cylinders and parts, known as our CiP (Cylinder-in-Plane) product line. We use finished CiP component products in the fabrication of compressor units for sale or rental by us or sell the finished component products to other compressor fabricators. We also design, fabricate, sell, install, and service flare stacks and related ignition and control devices for onshore and offshore incineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. To provide customer support for our compressor and flare sales businesses, we stock varying levels of replacement parts at ourMidland, Texas facility and at field service locations. We also provide an exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors to facilitate this business.
We provide service and maintenance to our customers under written maintenance contracts or on an as-required basis in the absence of a service contract. Maintenance agreements typically have terms of six months to one year and require payment of a monthly fee.
14
--------------------------------------------------------------------------------
The oil and natural gas equipment rental and services industry is cyclical in
nature. The most critical factor in assessing the outlook for the industry is
the worldwide supply and demand for oil and natural gas and the corresponding
changes in commodity prices. As demand and prices increase, oil and natural gas
producers typically increase their capital expenditures for drilling,
development and production activities, although recent equity capital
constraints and demands from institutional investors to keep spending within
operating cash flow have meaningfully restrained capital expenditure budgets of
domestic exploration and production companies. Generally, increased capital
expenditures ultimately result in greater revenues and profits for service and
equipment companies.
In general, we expect our overall business activity and revenues to track the
level of activity in the oil and natural gas industry, with changes in crude oil
and condensate production and consumption levels and prices affecting our
business more than changes in domestic natural gas production and consumption
levels and prices. In recent years we have increased our rentals and sales in
unconventional oil shale plays, which are more dependent on crude oil prices.
With this shift towards oil production, the demand for overall compression
services and products is driven by two general factors: an increased focus by
producers on artificial lift applications, e.g., production enhancement with
compression assisted gas lift; and declining reservoir pressure in maturing
natural gas producing fields, especially unconventional production. These types
of applications have historically been serviced by wellhead size compressors,
and continue to be, but there has also been an economic move by our customers
towards centralized drilling and production facilities, which have increased the
market need for larger horsepower compressor packages. We recognized this need
in recent years and have been shifting our cash and fabrication resources
towards designing, fabricating and renting gas compressor packages that range
from 400 horsepower up to 1,500 horsepower. While this is a response to market
conditions and trends, it also provides us with the opportunity to compete as a
full-line compression provider.
Industry Update
We typically experience a decline in demand during periods of low crude oil and natural gas prices. During the first quarter of 2020, we saw a substantial decline in the prices for oil and natural gas. Commodity prices stabilized during 2021 with a sharp increase through the first three months of 2022. Historically, activity levels of exploration and production companies have been dependent on commodity prices. However, recent capital market focus on cash returns from exploration and production companies has restricted capital spending below levels that have historically been observed during higher commodity price environments. Generally, though, we feel that production activities (in which we are involved) will fare better than drilling activity. This is reflected in both the stability of our rental revenues, which is driven by production activities, and the volatility of our compressor sales, which tends to fluctuate with capital allocations. As such, we still expect compressor sales to be low for the remainder of 2022, as exploration and production companies have elected to rent compression units rather than allocating capital dollars to purchase new compression.
Results of Operations
Three months ended
The table below shows our revenues and percentage of total revenues of each of
our product lines for the three months ended
Three months ended March 31,
2022 2021
(in thousands)
Rental $ 17,129 84.2 % $ 15,341 83.4 %
Sales 2,893 14.2 % 2,711 14.7 %
Service and Maintenance 314 1.5 % 345 1.9 %
Total $ 20,336 $ 18,397
Total revenue increased 10.5% to $20.3 million for the three months ended March
31, 2022 compared to $18.4 million for the three months ended March 31, 2021 .
This increase was primarily a result of higher rental revenue (11.7% increase)
during 2022 as well as higher sales revenue (7% increase).
15
--------------------------------------------------------------------------------
Rental revenue increased to $17.1 million for the three months ended March 31,
2022 compared to $15.3 million for the same period in 2021. This increase during
the first quarter of 2022 was attributable to an increase in high horsepower
compression rentals as these units carry a higher revenue rate than our lower
horsepower units.
As of March 31, 2022 , we had 2,033 compressor packages in our fleet, down from
2,238 units at March 31, 2021 due to the retirement of units during the fourth
quarter of 2021. The Company's total unit horsepower decreased to 421,422
horsepower at March 31, 2022 compared to 441,911 horsepower at March 31, 2021 ,
due to the aforementioned unit retirements in the fourth quarter of 2021
partially offset by the addition to the Company's fleet of 27 high horsepower
compressors with 10,900 horsepower over the past 12 months. As of March 31,
2022 , we had 1,276 natural gas compressors with a total of 306,834 horsepower
rented to 79 customers, compared to 1,265 natural gas compressors with a total
of 287,914 horsepower rented to 80 customers as of March 31, 2021 . As a result,
our total rented horsepower as of March 31, 2022 increased by 6.6% over the last
twelve months. Our rental fleet had unit utilization as of March 31, 2022 , and
2021, respectively, of 62.8% and 56.5%, and our horsepower utilization for the
same period ends increased to 72.8% from 65.2%. Our total rented horsepower
increased by 6.6% contrasted against a 0.9% increase in total rented units. This
illustrates the growing demand for our high horsepower units while the demand
for our smaller and medium horsepower units has not recovered in line with
recent commodity price increases.
Sales revenue increased to $2.9 million for the three months ended March 31,
2022 compared to $2.7 million for the three months ended March 31, 2021 . This
increase is mostly attributable to increased compressor sales during the first
quarter of 2022 compared to the same period in 2021. Sales are subject to
fluctuations in timing of industry activity related to our customers' capital
projects and, as such, can vary substantially between periods.
Cost of rentals increased to $9.2 million during the three months ended March
31, 2022 compared to $7.2 million during the three months ended March 31, 2021 .
While rental revenues increased 11.7%, this 29.0% increase in costs of rentals
is primarily due to inflationary pressures on labor and parts as well as a
significant increase in repair and maintenance work on our rental fleet. While
repair and maintenance expenses are customary in our business, the timing of
such expenses can fluctuate between periods resulting in periods with larger
than normal expenses.
Cost of sales decreased 24.0% to $2.0 million during the three months ended
March 31, 2022 compared to $2.6 million during the three months ended March 31,
2021 . This decrease was primarily due to a reduction in unabsorbed costs during
the period.
Selling, general, and administrative ("SG&A") expenses decreased 5.5% to $2.5
million for the three months ended March 31, 2022 compared $2.6 million during
the same period in 2021. This decrease in SG&A expenses was primarily
attributable to a decrease in stock compensation expense and a decrease in
non-cash charges related to our deferred compensation program.
Depreciation and amortization expense decreased to $6.1 million for the three
months ended March 31, 2022 compared to $6.3 million for the three months ended
March 31, 2021 . This was the result of a reduction in our rental fleet due to
unit retirements in the fourth quarter of 2021.
We recorded an income tax benefit of approximately $11,000 for the three months
ended March 31, 2022 compared to an income tax expense of $(125,000) for the
three months ended March 31, 2021 . For interim periods, our income tax benefit
(expense) is computed based upon our estimated annual effective tax rate and any
discrete items that impact the interim periods. Our estimated annual effective
tax rate differs from the U.S. federal statutory rate of 21%.
Non-GAAP Financial Measures
Our definition and use of Adjusted EBITDA
"Adjusted EBITDA" is a non-GAAP financial measure that we define as earnings
(net (loss) income) before interest, taxes, depreciation and amortization, as
well as non-cash stock compensation, impairment of goodwill, an increase in
inventory allowance and inventory write-offs, and retirement of rental
equipment. This term, as used and defined by us, may not be comparable to
similarly titled measures employed by other companies and is not a measure of
performance calculated in accordance with GAAP. Adjusted EBITDA should not be
considered in isolation or as a substitute for operating income, net income or
loss, cash flows provided by operating, investing and financing activities, or
other income or cash flow statement data prepared in accordance with
GAAP. However, management believes Adjusted EBITDA is useful to an investor in
evaluating our operating performance because:
16
--------------------------------------------------------------------------------
•it is widely used by investors in the energy industry to measure a company's
operating performance without regard to items excluded from the calculation of
Adjusted EBITDA, which can vary substantially from company to company depending
upon accounting methods and book value of assets, capital structure and the
method by which assets were acquired, among other factors;
•it helps investors to more meaningfully evaluate and compare the results of our
operations from period to period by removing the impact of our capital structure
and asset base from our operating structure; and
•it is used by our management for various purposes, including as a measure of operating performance, in presentations to our Board of Directors, and as a basis for strategic planning and forecasting.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under generally accepted accounting principles. Some of these limitations are:
•Adjusted EBITDA does not reflect our cash expenditures, future requirements for capital expenditures, or contractual commitments;
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted EBITDA does not reflect the cash requirements necessary to service interest or principal payments on our debts; and
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any capital expenditures for such replacements.
There are other material limitations to using Adjusted EBITDA as a measure of performance, including the inability to analyze the impact of certain recurring items that materially affect our net income or loss, and the lack of comparability of results of operations of different companies. Please read the table below under "Reconciliation" to see how Adjusted EBITDA reconciles to our net (loss) income, the most directly comparable GAAP financial measure.
Reconciliation
The following table reconciles our net (loss) income, the most directly comparable GAAP financial measure, to Adjusted EBITDA:
Three months ended March 31,
2022 2021
(in thousands)
Net income (loss) $ 337 $ (394)
Interest expense 24 1
Income tax expense (benefit) (11) 125
Depreciation and amortization 6,061 6,297
Non-cash stock compensation expense 423 474
Adjusted EBITDA $ 6,834 $ 6,503 For the three months ended
17
--------------------------------------------------------------------------------Liquidity and Capital Resources
Our working capital positions as ofMarch 31, 2022 andDecember 31, 2021 are set forth below: March 31, December 31, 2022 2021 (in thousands) Current Assets: Cash and cash equivalents$ 16,426 $ 22,942 Trade accounts receivable, net 12,882 10,389 Inventory 17,331 19,329 Federal income tax receivable 11,538 11,538 Prepaid income taxes 54 51 Prepaid expenses and other 613 854 Total current assets 58,844 65,103 Current Liabilities: Accounts payable 5,604 4,795 Accrued liabilities 12,945 14,103 Line of credit - - Current operating leases 120 68 Deferred income - 1,312 Total current liabilities 18,669 20,278 Total working capital$ 40,175 $ 44,825 For the three months endedMarch 31, 2022 , we invested$8.2 million in rental and property and other equipment. During the three months endedMarch 31, 2022 , we added$8.1 million in new equipment to our rental fleet and$0.1 million mostly in vehicles as well as various other machinery and equipment. Our investment in rental equipment, property and other equipment also includes any changes to work-in-process related to our rental fleet jobs at the beginning of the period compared to the end of the period. Our rental work-in-process increased by$1.6 million during the three months endedMarch 31, 2022 . We financed our investment in rental equipment, property and other equipment with cash flow from operations and cash on hand. We anticipate that our cash flows from operations as well as our borrowing capacity under our New Credit Agreement will provide ample liquidity for our planned capital expenditures during the remainder of 2022 and beyond.
Cash flows
AtMarch 31, 2022 , we had cash and cash equivalents of$16.4 million compared to$22.9 million atDecember 31, 2021 . Our cash flows from operating activities of$5.0 million were offset by capital expenditures of$8.2 million during the three months endedMarch 31, 2022 . We had working capital of$40.2 million atMarch 31, 2022 compared to$44.8 million atDecember 31, 2021 . We generated cash flows from operating activities of$5.0 million during the first three months of 2022 compared to cash flows provided by operating activities of$7.4 million for the first three months of 2021. The decline in cash flows from operating activities was primarily driven by higher costs of rentals during the first three months of 2022. These increases were partially offset by slightly higher sales margins. Strategy For the remainder of 2022, our overall plan is to continue monitoring and holding expenses in line with the anticipated level of activity, fabricate rental fleet equipment only in direct response to market requirements, emphasize marketing of our idle gas compressor units and limit bank borrowing in line with market conditions. For the remainder of 2022, our forecasted capital expenditures are not anticipated to exceed our internally generated cash flows and our cash on hand. Any required capital will be for contracted, premium-priced additions to our compressor rental fleet and/or required service vehicles. We believe that cash flows from operations and our current cash position will be sufficient to satisfy our capital and liquidity requirements for the foreseeable future. 18 --------------------------------------------------------------------------------
Bank Borrowings
We have a senior secured revolving credit agreement the ("Credit Agreement")
with Texas Capital Bank, National Association (the "Lender") with an initial
commitment of $20 million , and an accordion feature that would increase the
maximum commitment to $30 million , subject to collateral availability. We also
have a right to request from the Lender, on an uncommitted basis, an increase of
up to $30 million on the aggregate commitment; provided however, the aggregate
commitment amount is not permitted to exceed $50 million . The maturity date of
the Credit Agreement is May 11, 2026 . As of March 31, 2022 , we did not have any
borrowings outstanding under the Credit Agreement.
Critical Accounting Policies and Practices
There have been no changes in the critical accounting policies disclosed in the
Company's Form 10-K for the year ended
Recently Issued Accounting Pronouncements
Please read Note 2, Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements in our condensed consolidated financial statements in this report.
Off-Balance Sheet Arrangements
From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As ofMarch 31, 2022 , the off-balance sheet arrangements and transactions that we have entered into include purchase agreements. We do not believe that these arrangements are reasonably likely to materially affect our liquidity or availability of capital resources.
Special Note Regarding Forward-Looking Statements
Except for historical information contained herein, the statements in this report are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise; the introduction of competing technologies by other companies; a prolonged, substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our products and services; and new governmental safety, health and environmental regulations, which could require us to make significant capital expenditures. The forward-looking statements included in this Form 10-Q are only made as of the date of this report, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. A discussion of these and other risk factors is included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC .
© Edgar Online, source
